US dollar pessimism heightened as consumer confidence in the US plunged to a 26-year low, and led to increased bets of additional rate cuts as the economy faces a recession. As a result, the US dollar fell the most against the low yielding Yen, with the Swiss franc following as the pair traded in parity. Against the European currencies, the euro advanced against the US dollar as rising wholesale prices added to inflationary concerns, while the British Pound inched lower to hold at 1.971. Amid the mounting losses, the US dollar strengthened against the commodity currencies as investors moved out of carry trades, with the New Zealand dollar taking the biggest fall as it fell to 0.793.
The release of the 2002 FOMC Meeting transcripts were released this morning and spurred increased speculation that the Fed will resort to more rate cuts as rising economic turmoil persists to cripple the world’s biggest economy. The transcript offered a great deal if insight on Bernanke’s appointment, and reflects the mutual consent by Bernanke and Greenspan in a statement which said, “if things take a turn for the worse, we should be prepared to act very aggressively.” Increasing downside risks for the economy continues to surface as the U. of Michigan Confidence index plunged to a 26 year low of 63.2, with consumers feeling the strains in the economy as employment and growth prospects fade. Rising inflationary pressures also sparked concerns for the economy as the Import Price index jumped to 14.8 percent from 13.6 percent, with most of the blame falling on rising petroleum prices.
Investor sentiment in the stock markets wavered as General Electric posted a 6 percent decline in first-quarter profits, and pushed the markets to consolidate most of the week’s gains. As a result, the DJIA plunged 256.56 points to 12,325.42 points, with 29 of the 30 components declining. The broader S&P 500 fell 27.72 points to 1,332.83 points, with the amount of decliners more than tripling the amount of advancers.
Rising uncertainties for the US economy has lowered the attractiveness of high risk/reward investments, and in turn, pushed many risk adverse investors into the safe haven of risk free bonds. As demands for bonds increased, the benchmark 10- Year yield dropped to 3.475 percent from 3.541 percent, while the 2-Year plunged to 1.754 percent from 1.839 percent.
Looking ahead, Advance Retail Sales are expected to kick off the week on a better note as we forecast sale to pick up from minus 0.6 percent to 0.1 percent, and expect Business Inventories to follow as we predict the index to fall to 0.5 percent from 0.8 percent. Following economic data, our focus will be turned to ECB President Trichet’s speech at 21:30 GMT.